Decoupling and Motivation: Re-Calibrating Standards of Fiduciary Review, Rethinking 'Disinterested' Shareholder Decisions, and Deconstructing 'De-SPACs'
Business Lawyer (Vol. 78, Issue 4, Fall 2023, Forthcoming)
48 Pages Posted: 2 Aug 2023 Last revised: 25 Oct 2023
Date Written: September 28, 2023
At the heart of corporate governance are fundamental doctrines that limit court scrutiny of fiduciary and stockholder decisions: the business judgment rule limits scrutiny of informed director decisions and, as with Corwin cleansing, informed voting by “disinterested” shareholders is accorded substantial deference. Only when, for example, the motivations of a director or controlling shareholder are sufficiently suspect would either the “entire fairness” or “enhanced scrutiny” standards of review apply. How to assess such motivations, however, is underdeveloped in the case law.
This Article addresses this task in three areas, relying partly on a methodology for assessing a person’s overall economic motivation flowing from the person’s financial stakes in or directly relating to the corporation. The methodology, from the analytical framework for “decoupling” (e.g., “empty voting”) introduced in 2006 deconstructs the person’s “overall economic interest” in a company’s shares (“host shares”) from such stakes by considering the net effect of the person’s: (a) host shares; (b) “coupled assets;” and (c) “related non-host assets.
First, the Article offers a re-calibration of standards of judicial review of fiduciary decisions when a fiduciary has financial stakes on both sides of the challenged transaction (as with Elon Musk in the 2022 Tesla-SolarCity merger case). Dubious outcomes flow from the traditional approach to choosing from the triad of the business judgment rule, enhanced scrutiny, and entire fairness. We show, for example, how courts use entire fairness in circumstances not meriting such review, such as where a controller’s percentage ownership stakes in the corporation and a counterparty are identical. We also offer a generalized approach methodically mapping the triad of zero, materially positive, and materially negative “overall economic interest” to the triad of standards of review.
Second, the Article shows that court deference to “disinterested” shareholder decisions needs rethinking, due largely to the now overwhelmingly institutional ownership of public companies combined with the prevalence of new financial stake patterns and new organizational voting dynamics at institutions. As to new financial stake patterns, related non-host asset issues (e.g., increased index investing in conjunction with increased asset manager size) and coupled asset issues will often result in institutional investors having a zero or negative “overall economic interest” in host shares. We show this both by looking at “related non-host assets” of large asset managers not party to the 2010 CNX-T. Rowe Price case and by offering broader evidence. (These foregoing effects are independent of the usual cost/lack of payoff reasons why many believe index funds are less motivated to invest in corporate stewardship.) Rigid application of existing law would disqualify asset managers from being considered “disinterested” shareholders with surprising, likely undesirable, frequency. We propose steps to improve the integrity of shareholder voting while mitigating that undesirable prospect. We also propose a general method for determining when an institutional investor’s overall economic interest should be deemed “material.” As to organizational voting dynamics, court precedents suggest that being “disinterested” rests on the premise of a motivation to maximize the value of host shares. If institutional investors heed calls to consider non-share price-directed goals, this conceptual basis for deference is brought into question. Other new organizational voting dynamics, such as “pass-through voting,” raise mechanical complexities. The very idea of a “disinterested” shareholder is increasingly a convenient myth.
Third, this Article addresses a novel and especially challenging context for assessing motivation: the “de-SPACing” of special purpose acquisition companies (SPACs). The 2023 Delman case takes the welcome step of analyzing deference to shareholder “cleansing” by relying in part on certain aspects of the decoupling framework. This Article shows how full deployment of the framework’s deconstruction methodology, however, could not only provide more comprehensive guidance as to shareholder cleansing but also provide guidance in selecting the proper standard of review of fiduciary decisions.
Keywords: board, controller, common ownership, Corwin, decoupling, Delaware, empty voter, entire fairness, ESG, fiduciary duty, governance, institutional investor, judicial review, merger, pass-through voting, shareholder voting, socially responsible investing, SPAC
JEL Classification: D21, D85, G00, G23, G28, G30, G32, G34, G38, K20, K22, K41, L16, L21, L41
Suggested Citation: Suggested Citation